Explanation:
First, convert the annual Conditional Prepayment Rate (CPR) to a monthly Single Monthly Mortality (SMM) rate:
.
The expected principal prepayment for the month is the SMM multiplied by the beginning loan balance (assuming scheduled principal is negligible or already accounted for in this context):
$0.002535 \times 15,000,000 = \text{USD } 38,025$.
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Q.13 A hedge fund manager purchases a seasoned 4.5% agency MBS with a weighted average loan age of 48 months. The current balance on the loans at the beginning of this month is USD 15 million, and the conditional prepayment rate is assumed to be constant at 3% per year. What is the closest to the expected principal prepayment this month?
A
USD 42,200
B
USD 91,667
C
USD 38,025
D
USD 90,000
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